“Where did all my money go?” and “If I’m making that much, why don’t I have anything left?” are comments I hear far too often from business owners. Having a business built around horses—given their need to eat and their penchant for getting hurt—makes it even more challenging to have money left at the end of the month.
So how DO you figure out where the money went? The answers are in your accounting records, aka your business “books”. The Income Statement (sometimes called a Statement of Profit & Loss) has a whole section devoted to Expenses. That’s basically a list of where your money went.
If you haven’t already, take the time to get familiar with your Expenses. Which ones have the biggest amounts? Which ones have changed the most, when compared to last month or last year? Do you understand why?
One useful way to analyze costs is to divide them into Fixed Costs and Variable Costs. As their name implies, Fixed Costs don’t change quickly or easily. A mortgage payment is many people’s most fixed cost—unless you sell or refinance, you’ll be writing a check for the same amount each month for the next several decades. A truck or trailer loan with five years of payments remaining counts as a fixed cost also. Business license, insurance, and phone service are fixed costs for most businesses. These are the places your money goes every month, whether your business is prospering or struggling.
Variable Costs are the things that change as the volume and mix of services in your business changes. Hay, feed, and bedding tend to vary directly with the number of horses on your farm. Season often drives the variation in electricity cost, depending on your mix of fans, heaters, and arena lights. For most businesses, labor costs vary in a pattern that looks like stair steps, as you add or let go part-time or full-time staff members. School horses have a similar step-pattern increase in costs.
The larger your Fixed Costs are relative to your Variable Costs, the more sensitive your business is to a change in sales volume. There’s not a ‘right’ or ‘wrong’ answer to what the proportion should be, but a good guideline is that the more inconsistent your income, the more you want to keep costs variable. If your income is seasonal, what can you do to make your costs seasonal as well? Does it make sense to lease extra school horses instead of buying them, or hire someone to mow instead of taking out a loan with monthly payments to buy a tractor and bush hog?